The End of the Traditional IRA As You Know It

Dan Dzombak  for the Motley Fool writes: With all the varying eligibility and tax-deduction rules out there, saving for retirement is often a confusing prospect. Now, after three years of work, Rep. Dave Camp (R-Mich.), the chairman of the Ways and Means Committee, has released his proposal for tax reform, and one of his plans for simplifying retirement savings is to prohibit new contributions to traditional IRAs and make the Roth the only IRA option.

Let's look at what the Camp Plan's proposals might mean for you.

The end of the traditional IRA?
Individual retirement accounts currently come in two flavors: traditional and Roth. Traditional IRAs allow your investments to grow tax-free until you withdraw them. Withdrawals are taxed as regular income, and contributions can be tax-deductible, depending on whether you have a retirement plan through work and on your income level.

Roth IRAs also let your investments grow tax-free, but contributions are never tax-deductible, and you can't use a Roth if your income is above a certain level. The benefit of a Roth is thatwithdrawals are tax-free as long as you meet certain requirements.

The Camp Plan would end new contributions to traditional IRAs and open up Roths to everyone. The reasoning is twofold: First, having two types of IRAs with lots of rules and complexities creates confusion and causes some people not to save at all. Second, many people with traditional IRAs don't realize they'll owe taxes when they begin their distributions, which means people end up having less for retirement than they thought they would.

The bottom line
Although people would lose a tool for retirement planning under the Camp Plan, a default option to the Roth IRA would simplify everybody's taxes and encourage more Americans to save for retirement. That's a winning option for anyone who's trying to ensure a comfortable retirement.

COMMENTS

• On March 02, 2014, at 1:19 PM, NanaKnows wrote:

  Without a traditional IRA option, how would one rollover a 401(k) plan?

• Report this CommentOn March 02, 2014, at 1:31 PM, ajadeheart wrote:

  Introduced by a Republican. Sounds like an elimination of a "tax break" to the middle-class in America. Are we too stupid to figure out how to reduce our taxes in retirement. Lucky if the majority of seniors live 20 years into retirement and for 38 yrs of working life, (amount of years needed in SS calculation of benefits for full benefits, it's complicated there is more; but if middle class "me" can figure it out on a spread sheet, you can too) we have no tax breaks. Why not increase the capital gains tax on incomes over $250K that would bring in tax revenue from individuals and corporations. At the current rate of 15% on capital gains, it has not increased employment in this country as every Republican wants to tout as a reason to reduce capital gains tax. We need to tax at a 32% rate on capital gains for everyone. Capital gains is money making money not money being earned from employment. Will something like this bill pass because it is a Republican majority controlling the houses right now? Well, the President does have veto power.

• Report this CommentOn March 02, 2014, at 2:27 PM, TMFDanDzombak wrote:

  @NanaKnows You would still be able to roll over a traditional 401k to a traditional IRA. When you went to contribute to your IRA however you could only contribute to Roth IRAs

• Report this CommentOn March 02, 2014, at 2:47 PM, steve363 wrote:

  The author claims that the bottom line is that more Americans would be encouraged to save.

  How would REMOVING an option for retirement savings encourage MORE retirement savings? Not a very smart comment.

• Report this CommentOn March 02, 2014, at 3:31 PM, TMFDanDzombak wrote:

  @steve363 It's called the paradox of choice, the more options the less likely someone is to make a choice.

  http://en.wikipedia.org/wiki/The_Paradox_of_Choice:_Why_More...

• Report this CommentOn March 02, 2014, at 3:46 PM, ferdiefor wrote:

  Long term you are better off with ROTH. The reason is the possibility exists for people to actually run their traditional IRAs down to zero meaning they truly outlive their retirement assets.

  I changed to ROTH when the financial crisis smashed my IRA so that I could get it done at minimal tax cost. My ROTH has since more than doubled back to recovery and then some.... but I now have the ROTH advantages.

  I have clients that are starting to have to take mandatory high five figure and six figure distributions from traditional IRAs. Now you may not sympathize with their situation but even they are afraid of running out of assets should they outlive their life expectancy.

  Once you get past the initial period of adjustment there is no difference to funding a ROTH because you would have made the lifestyle adjustments required because contributions are with after-tax dollars.

• Report this CommentOn March 02, 2014, at 5:43 PM, SomeDude wrote:

  If you are in a lower tax bracket when you retire, because you didn't save enough to keep your income level the same, the traditional IRA can be the better tax choice. Of course, that is a gamble on what future tax rates will be, where the roth eliminates the future higher rates issue. This seems more like a stealth tax increase than anything else, because it will increase current tax revenues if the traditional option is eliminated. A lot of people fund traditional IRA's to decrease their current tax liability, so taking away that option eliminates the ability to decrease current taxes with a contribution. I would think that will lead to less total contributions to IRAs.

• Report this CommentOn March 02, 2014, at 6:09 PM, dbtuner wrote:

  Roth's are a scam. The government will change the rules on them in the future. So you will pay tax on the money you invested and when you take it out. Just watch.

  Take the tax break now.

• Report this CommentOn March 02, 2014, at 7:07 PM, Mentallect wrote:

  Clearly the GOP wants middleclass people to pay taxes now rather than later. If middle and low-middleclass people delay paying taxes using the Traditional IRA, then the Top 1% will have to actually pay their share of taxes today instead of having all those loopholes allow them to pay 0% taxes as many do now.

  The Traditional IRA is good for the middleclass, but not so good for the rich. I want to see the GOP introduce a bill which helps non-Rich people for once.

• Report this CommentOn March 02, 2014, at 9:08 PM, AlanMichael wrote:

  As a tax accountant of 20 year I can opine with confidence when I say that taking the tax deduction out of IRA contributions will NOT encourage more retirement savings. This is political posturing, nothing more.

• Report this CommentOn March 02, 2014, at 9:17 PM, ddewar2k wrote:

  Wouldn't forcing those who are currently in a tradition IRA to contribute to a ROTH IRA complicate their tax situation. When they retire they would need to distinguish withdrawals from contributions to a tax deferred IRA versus a non-tax deferred ROTH IRA.

  A great data point to add to this article would be the growth of a ROTH IRA versus a Traditional IRA. I would think since the ROTH IRA is not tax deferred the ROTH contribution would be less and therefore the growth due to compounding interest is less.

• Report this CommentOn March 03, 2014, at 12:32 AM, jimdandy wrote:

  @ajadeheart- you're blaming Republicans for something that isn't really their fault. I worked for a very wealthy family owned business for 22 years. I was not part of the family that owned the business but rather one of the managers. During every election, the owners would try to sway/persuade the employees to vote Democratic for which I was extremely surprised. I asked the son of the owner why he voted Democratic instead of the Republican ticket and his answer was quote " because I am not going to pay any GD taxes, that's why!" I started watching the very wealthiest of people and they all are Democrats as well. They don't pay taxes either. The Democrats want you to believe that they are for the so called "working man" but most have never even held a job! Get real folks. Politicians are out for themselves period. We have to get in their face and let them know that they are one termers if they don't serve the people and not themselves. Look at the current President. He is serving no-one but himself. Think about that for a while....

• Report this CommentOn March 03, 2014, at 7:59 AM, AHuston wrote:

  So is it really a paradox of choice, that keeps people from investing? Only having one option (the Roth IRA), instead of two options (a Roth or a traditional IRA) will eliminate choice. One would have no choice but to invest in a Roth IRA. We have now eliminated the only choice people had if traditional IRAs better suit their economic situation and retirement goals. Shows how short sighted the Camp proposal is. Bring in more tax dollars now and be short of tax dollars in the future. Kick the can down the road and let your grandchildren pay for it.
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